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The Road to Maturity: An Overview of Self-Storage Supply, Performance, Investment and Recovery

Self-storage is proving to be resilient under economic uncertainty, despite having supplied enough storage units to satisfy the pent-up demand it had been building toward for 40 years. The industry has now reached a fork in the road to maturity, similar to the one the hotel industry reached following the Great Depression. One road offers opportunities while the other has challenges.

The opportunities will be for those with professional management skills and access to operating capital necessary to compete in today’s marketplace. These travelers include the public companies, larger operators and institutional investors. The challenge will be for the owners and operators who have enjoyed a relatively safe, secure and profitable investment that required only minimum management skills and little operating capital.

Pockets of Recovery

If we’ve learned one thing about the performance of self-storage during this recession, it’s that we can no longer generalize about anything, including the rate of recovery. There are pockets of revival, and the rate varies from one location to another, even within the same metropolitan area.

Pockets that were hit the hardest by the downturn, for instance Florida and Michigan, are slower to recover than other areas. Some markets, such as California and Texas, were slower to feel the impact of the recession, and are slower to recover. The hardest hit areas of the country are those that experienced the most overbuilding and the greatest loss of jobs. Markets like Washington, D.C., with its large number of government employees, has felt the recession the least.

Supply and Demand

No discussion about the state of the self-storage industry would be complete without addressing the issues of supply and demand. Nationwide, self-storage went into this recession without having an excessive oversupply of new facilities. However, there were pockets of overbuilding that have had―and will continue to have―a negative impact on performance for a period of time.

Contrary to popular belief, the decline in the operating performance was not caused by a recent huge amount of new construction. It was caused by the gradual but fairly steady addition of new space to the existing inventory over many years. (See accompanying graph, “Value of Self-Storage Construction.")

The current nationwide inventory of storage equates to one storage unit for every eight to 10 households. This takes into consideration commercial users. Many markets have even fewer households for every existing unit. When put into those terms, future demand takes on a whole new meaning.

The good news is there’s been a 23 percent decline in the number of projects in the pipeline, according to the latest statistics from The Dodge Project Center, which tracks construction projects. Any new construction has been limited to additions, alterations and few new starts.

Based on the rental activity of more than 900,000 units tracked monthly by Self Storage Data Services (SSDS), a Los Angeles-based provider of self-storage operating-performance statistics, demand for storage started to increase in April 2009 and continues at a fairly consistent rate. The increase in net absorption has been the result of a slowdown in the number of tenants moving out and an increase in new tenant move-ins.

The accompanying graph (“Monthly Net Absorption Nationwide”) illustrates the long-term trend in net absorption of units based on the net difference in the ratio of move-ins to move-outs. In September 2010 (the latest data available at the time of this writing), there were 3 percent more tenants moving into storage than moving out. In estimating the future demand for storage, consideration must be given to the impact of 79 million baby boomers hitting retirement age and not knowing their propensity to use storage in retirement, or their ability to afford it.

Operating Performance

The national operating performance of facilities peaked in 2006 as demonstrated by the decline in the rate of change in rental income compared to the historical average. In the first quarter of 2006, facilities were operating at 10 percent above their historical seven-year average. The rate of change in rental income compared to the historical average became negative in the second quarter of 2008 and reached a low point a year later.